A Simple Guide To SIPPS: Our IFAs Take You Through It
A “SIPP” can sound intimidating to many people (“self-invested personal pension”). Yet with a little guidance, they are not too hard to wrap your head around.
In this article, our Lincoln-based Independent Financial Advisers (IFAs) share some insights into how SIPPs work, how they can benefit you, and some tips to look out for.
What is a SIPP?
With most types of pension, you set aside money each month into a pension “pot”. Instead of this being a regular savings account, however, you put it into a designated set of investments, which currently can be accessed when you are 55, being the minimum age pension benefits can be taken.
During this time, your money is shielded from tax and hopefully grows significantly through compound interest. By the time you retire, you then choose how to withdraw your money.
With many such pensions, you simply put money aside each month as you work. Someone else then manages the money for you (e.g. your workplace pension provider). Often, especially with bespoke pension arrangements, a financial adviser or wealth manager gets involved with managing your pension investments and keeping them on track with your financial goals.
With other types – such as SIPPs – you can self-invest, or take more control over your collection of pension investments (i.e. your “portfolio”).
SIPPs & Personal Pensions
Due to rapid developments in technology (e.g. online platforms which allow lower running costs for SIPPs), this type of pension has become much more mainstream since 2000. Indeed, some estimates put SIPPs at around 15% of the UK personal pension market.
SIPPs operate under the same regulations as other personal pensions. Indeed, sometimes the distinction between SIPPs and personal pensions is blurred, as many of the latter offer a wide range of fund choices – effectively giving you lots of control.
Ultimately, the key difference between the two is that the former allows you to self-invest.
Busting Some Myths
As IFAs, we often hear many misconceptions around SIPPs. Some of which we will counter here.
The first myth is that SIPPs are just too complicated – therefore, they’re not worth the trouble.
We completely understand how something complex can be demotivating, but it’s worth stating that pensions in general are not always easy to wrap your head around!
SIPPs are not necessarily more complex than other pensions. The main difference is they give you more control over your money.
Working with a local, qualified IFA in Lincolnshire can really help. They should be able to explain the important facts to you, in a clear, understandable way.
The second myth is that SIPPs are more expensive than other pensions. As mentioned above, this is not necessarily the case. Advances in technology, as well as more pension providers entering the market, have worked together to drive costs down over the years.
Admittedly SIPP charges can be higher than those for other personal pensions depending on the degree of sophistication required e.g. the ability to purchase commercial property via a SIPP. Yet if you place a high value on investment freedom, this can sometimes be worth the cost.
As always, you should consult with an experienced IFA about your options before making any big decisions. You need to choose what’s right for you, and your goals.
Thirdly and finally, there is a conception still out there that SIPPs are only for the super-wealthy.
Not too long ago, this was probably a fair point. The up-front fees, annual charges and other tariffs often made SIPPs an unattractive choice for people with investments below £100,000.
Today, however, as costs have lowered, so has the barrier to entry. There are now many different types of SIPPs and providers, many of which are suitable for smaller investment pots.
Is a SIPP Right For Me?
The obvious answer to this question is – it depends!
If you have a good grasp of investment knowledge, and want more choice over the money going into your pension, then a SIPP can be an attractive choice.
For those who don’t place a high value on the above, and are actually quite happy to let someone else with experience manage your pension, then a SIPP probably isn’t for you.
These are just a handful of factors to consider when thinking about whether to invest your pension into a SIPP. As always, there is a much bigger picture and many other variables to take into account before committing one way or the other.
We highly recommend finding a well-qualified, experienced and local independent financial adviser in Lincoln prior to making any big financial decisions like this. Our team at Castlegate, for instance, will be able to identify areas you may not have thought of, or shed new light on something you thought you had already figured out. Get the most up-to-date, impartial and important information before going forward.
Transferring to a SIPP
If, after speaking with your independent financial adviser, you decide you want to transfer your existing pension to a SIPP, then it is possible to do this.
You will need to seek professional financial advice, and make yourself aware of the charges you are likely to incur by switching your pension over like this. Sometimes they can be worth the price, especially over the longer term. Sometimes, however, they are not.
Transferring your personal pension to a SIPP is often easier than transferring from a workplace pension. Final salary schemes, for instance, have a requirement for members to take advice before transferring to a SIPP to benefit from increased flexibility where the value of your benefits is £30,000 or more.
If you are interested in finding out more about whether a SIPP is right for your financial goals and circumstances, then do get in touch. One of our Lincolnshire-based IFAs would be happy to hold a no-obligation phone call and initial exploratory meeting with you at our expense, to help you evaluate your options.